DBRS Confirms Industrial Alliance Ratings, Stable Trend

DBRS has confirmed its ratings on Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) and its related entities. All ratings have a Stable trend. The ratings are supported by the Company’s earnings stability, diversified earnings platform and reasonable capitalization. Despite the uncertain markets for financial services and investment products, IAG has maintained its profitability, reporting an ROE of 13.5% for the nine month period ending September 30, 2008, just below the Company’s 14% to 16% target range. Current profitability is largely a function of in-force business and continued, good expense management, offset to some degree by lower product sales, somewhat higher new business strain, new spending on systems and a poor experience related to the slump in the Canadian equity market, which has an impact on fee income. The current year has also seen an increase in credit-related losses, which nevertheless remain at a low level, given the inherent conservatism of the Company’s investment portfolio.

The Company has recently announced its fifteenth acquisition in the wealth-management segment, which continues its five-year strategic initiative to broaden and diversify its product offerings, its distribution channels and related earnings. The net impact of this diversification effort is the increase in the contribution to net income of wealth management to almost 30% of net income from just over than 20% as recently as 2004. Consistent with this growth by acquisition has been the Company’s success in growing the revenue and earnings contributions from customers outside Quebec, which now account for more than half of new sales.

The Company’s Solvency Ratio increased to 200% at the end of September, reflecting a $100 million increase in subordinated debt. Following a $100 million issue of Preferred Shares in November, the Solvency Ratio is expected to increase to 210%, subject to additional reserves and capital requirements on account of the continued deterioration in equity markets in October and November. With the Preferred Share issue, total debt ratio is expected to increase to 26.7%. The adjusted debt ratio, which gives some equity treatment to preferred shares, is expected to be just below 19%, which is well within DBRS tolerance for the current credit rating.

Despite the Company’s recent success in diversifying its sources of earnings by product, geography and distribution channel, ratings are limited by its relatively small scope and scale. Relative to its peer group, IAG also remains more heavily exposed to the stagnant individual life insurance market in Canada.

Note:
All figures are in Canadian dollars unless otherwise noted.